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Finance Minister Arun Jaitley’s Wednesday statement that the government is open to privatising sick public-sector undertakings seems to offer hope on 79 state-run companies that had an accumulated loss of Rs 55,656 crore in 2012-13, according to the latest available numbers.
By the government’s definition, a central public-sector enterprise (CPSE) is considered sick if its accumulated loss in a financial year is equal to or more than 50 per cent of its average net worth in the four immediately preceding years, and/or if it can be termed sick by the meaning in the Sick Industrial Companies (Special Provisions) Act, 1985.
The public-sector enterprises survey for 2012-13 shows that the number of sick CPSEs, 90 in 2004-05, came down to 66 in March 2012 but again climbed to 79 in March 2013. The result for the 2013-14 survey is not yet out. (PRIVATE MASTERS AHEAD?)
The survey also shows that the number of operating CPSEs registered with the Board for Industrial & Financial Reconstruction (BIFR) was stable in 2012-13, at 44. The good part was that their accumulated loss fell from Rs 65,642 crore the previous year. The number of sick CPSEs fell, albeit marginally, during this period — from 64 to 63. According to the survey for 2011-12, the 64 sick CPSEs as of that year had a combined employee strength of 226,188.
The prominent unlisted companies that figure on the list of sick companies are Air India, Hindustan Cables, Hindustan Fertilizer Corporation and Hindustan Photo Films.
For 2012-13, Air India had a negative net worth of Rs 15,642 crore, thanks to losses of over Rs 33,000 crore in the preceding six years. High cost and rising competition were among other reasons for the company’s weak finances.
The other three also had a significantly high negative net worth — of Rs 5,312 crore, Rs 8,550 crore and Rs 10,897 crore, respectively — at the end of 2012-13. These companies also reported losses for the financial year. Likewise, HMT Watches (Rs 2,012 crore), Indian Drugs & Pharmaceuticals (Rs 7,315 crore) and STCL (Rs 2,097 crore) witnessed high negative net worth at the end of 2012-13, besides losses for the year ended March 2013.
Among the listed PSUs that are sick are Hindustan Flourocarbons, Hindustan Organic Chemicals, HMT, and ITI (excluding revaluation reserves), which had combined accumulated losses of Rs 6,503 crore at the end of March 2014, according to Capitaline data. Many of these companies saw their revenues declining in the past three to five years, while the losses of some increased during this period.
Cash flow from operations was also negative for these companies. And their debt-equity ratios were significantly high over the past few years. While debt increased for most, the shareholders’ funds declined because of losses.
The reasons are no secret. While some experts point to bureaucratic factors, many of these companies were not able to cope with the changing external environment. But, the 2012-13 survey shows the reasons are historical (takeover from private players) in some cases, while others became sick over the years on account of inadequate job orders, high manpower cost, lack of finance, technological obsolescence, high input costs and competition from cheap imports. Some were hit by the burden of serving macroeconomic objectives, but the common problem for most were poor debt-equity structure, slow decision-making and weak marketing strategies.
HMT (formerly known as Hindustan Machine Tools), for example, has over the past 61 years diversified into making watches, tractors, etc. For more than 10 years now, the company has been reporting consolidated losses after tax (adjusted for one-off items). Its reported bottom line was positive (at Rs 17 crore) only in 2005-06. And, since 2006-07, its accumulated losses have been rising — from Rs 770 crore to Rs 3,382 crore in 2013-14.
Experts say HMT, which was once a leader in the watch segment, controlling over a fourth of the Indian market, lost out to competition over time, especially from Titan. In September this year, the government decided to close down HMT’s watch division in a phased manner. In tractors, too, companies like Mahindra & Mahindra now dominate the market.
The case with ITI, which provides communication technology products and services, is a little different. Its sales have fallen sharply and the company continues to report losses at the net level.
Experts, however, believe it is possible to extract value from some of these companies or to revive those. So, if the government moves ahead with privatising or reviving these companies, their shareholders should gain. For example, a revival package for ITI and HMT Bearings (a subsidiary of HMT) was recommended last year. In fact, some companies like Bharat Coking, NEPA and Madras Fertilisers reported profits in 2013-14, though these continued to have a negative net worth with high accumulated losses.
At present, the policy is to first check the viability of reviving sick undertakings; and, if revival fails, these could be privatised through strategic sale of stake.
